Saturday, August 21, 2004

Texas Tea

From NYT:

Oil prices climbed nearer to $50 a barrel yesterday before retreating, as traders reacted to reports on the conflict in Iraq, concerned that growing unrest might interrupt crude oil exports.

On the Nymex, crude oil settled at $47.86 a barrel yesterday, the last day of the September futures contract. Earlier, the contract rose as high as $49.40 a barrel. Prices fell in afternoon trading amid conflicting reports over whether Iraqi police were in control of the Imam Ali shrine in Najaf, the scene of fierce fighting the last two weeks.

Still, the price of a futures contract can be distorted as it nears its expiration. The most active contract, crude oil for October delivery, ended at $46.72 a barrel yesterday, down 92 cents. Oil has gained 51 percent so far this year, reaching records every day except one since July 30.

[. . .]

From Tom

We're heading for a perfect storm in the global economy. Asian demand is soaring. Production capacity is maxed out and cannot be increased rapidly. China has been paying for its oil with the revenues from Wal-Mart commodities. As prices rise, China will start paying for its oil with the $400 billion in US treasuries it holds. That will spike domestic interest rates and our economy will spiral downward. Here's a chill-inducing interview with Phillip Verlanger that uncovers the coming crash.

Now, back to the Times:

How much will expensive oil hurt?

Over the last 30 years, the United States has been driven into recession three times by abrupt surges in the price of oil. As the price of crude has surged over the last two weeks, reaching new heights almost daily, some economists have begun to worry that the current "oil shock" will slam the brakes on the nation's economic expansion again.

It probably won't. Despite the disquieting parallels with the oil shocks of the 1970's, the 1980's and the 1990's, the impact of the current oil spike on the American economy is likely to be much less intense than in previous surges.

[. . .]

Are they kidding?

From an interview in Smart [link from Tom Paine]:

[. . .]

And it means the price of oil won't be coming down any time soon, says oil expert Philip Verlanger, senior fellow at the Institute of International Economics and founder of economic-consulting outfit PKVerlanger LLC. Verlanger thinks the only thing that will bring down the price of oil is, unfortunately, a recession. And that recession, he says, could be global.

[. . .] Last week, Saudi Arabia said it would pump an extra one million barrels a day, and the price of crude rose. That should have us worried, right?

Philip Verlanger: We should be very worried. The price of oil depends on the ability to process the crude into products that you and I can consume. We have some refinery constraints around the world right now that are pretty tight. What that means is that the incremental increase in Saudi crude can't do much good. There are serious refining constraints. The Saudis can announce what they want to announce, but we have a tightness in product markets. There's also a very tight heating-oil market in Europe, and it's not clear that it's going to clear up anytime soon. The other part of the problem is kind of unnoticed. The forward price of oil in say two or three years has risen very dramatically. If I'm a Japanese buyer and I'm worried about future oil prices — the Japanese have done this in the past — I can go buy on the futures market and hedge my costs. The December 2006 crude-oil price settled at $38.08. If I just look back a year ago, the December 2006 contract was at $24.67.

SM: So the market is saying this is a long-term trend.

PV: Yes. There are buyers who are very worried about capacity constraints, and this has become a real problem.

[. . .]

SM: That sounds pretty troubling, considering that the oil crisis triggered the stagflation economy of the 1970s.

PV: To say that we're going to go to stagflation is probably wrong. I've done some macrosimulations, and what you see is much slower growth because of oil, and probably a recession next year. The reason is this capacity constraint. The macroeconomists keep saying that higher oil prices do not have the impact on the U.S. or world economy that they used to. The rule of thumb for the U.S. is that $10 a barrel cuts U.S. GPD by three-tenths or four-tenths of a percent. But when you don't have any more oil, and you need more oil to grow, the question then becomes, how large a price increase do you need to stop economic growth? If $10 doesn't do it, maybe we get $20, if $20 doesn't work, maybe we get $30. So certainly I think that $50 [per bbl] is in shooting distance. [my emphasis]

[. . .]

Now, when you take this in concert with rising interest rates, which will slow the housing boom considerably and probably lead to a rash of foreclosures, we're gonna be in deep shit six months from now.

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